A Tribute to the Thoughts of Another and his Friend"Everyone knows where we have been. Let's see where we are going!" -Another

Friday, March 13, 2009

Argentina's Economic Collapse

This is a very good film. I highly recommend it. Over decades, the resources of Argentina were stolen from its people by the corrupt government enabling the centralized ownership of capital outside of the country. In a free market, capital resources will never become so centralized because they are most efficiently and profitably used when deployed in service to their regional populace. Only with the help of a corrupt government can capital ownership become so centralized (and separated from reality) that people end up dying.

And in my opinion, the real crime is that this was all done in the name of Capitalism!

This film demonstrates to me that the debate over public versus private ownership of capital resources is far too simplistic. The debate should really be about centralized (read: globalized) versus localized ownership, be it public or private.

Capitalism in practice is the most efficient use of capital resources as directed by the free market through the invisible hand described by Adam Smith, protected but unencumbered by government. In the case of Argentina, its previous socialist state ownership of its most valuable resources was far closer to real capitalism than the private ownership by global corporations which the corrupt government enabled. This caused the highly inefficient neglect and ultimate destruction of local capital resources for the enrichment of corrupt politicians and the global conglomerates in far-away lands they assisted.

This was also enabled by the centralized monetary and debt system of the international US dollar reserve system and the International Monetary Fund.

In Argentina, this culminated in economic, monetary, and political collapse beginning in late 2001. We, the rest of the world, are at the very beginning stages of this same collapse.

This film, however, has a positive message, a message of hope. And the hope BEGINS with the collapse in 2001. I think this is the most important message we can take away from this film. That the coming collapse is failure to the criminals and corrupt politicians, and opportunity to the rest of us.

We do not need a New World Order and a single global currency. That would be centralization in the WORST way. We need all regional currencies only in competition with Freegold as a wealth reserve. Public debts which were taken on in the name of the many but only benefited the few should either be written off or else charged to the few that benefited if they can be identified. This will be the result anyway, in the case of political failure. Corrupt and misguided politicians can only keep such a flawed system going if they remain in power.

Those betting on the relative safety of the U.S. Treasuries and U.S. dollar underestimate the relative depths and severity of the economic and systemic-solvency crises in the United States versus the rest of the world. Also underestimated is the upside inflation risk in the United States. The costs to the system of the stimulus and bailout packages will be inflation, with risks of high inflation moving to hyperinflation as early as the end of this year.-John Williams

Since there’s 10 times the money in circulation than in 2002, in real terms a dollar is worth one tenth of what it was then. All the rhetoric coming out of Washington and Wall Street is designed to make us overlook that simple fact. Never mind the economic systems in which this is happening. Such an exponential growth increase in one variable in any equation – be it physics, biology, astronomy – would represent an unsustainable force. Nature automatically seeks equilibrium and, at some point, some force or counter-opposing events to balance it. That hasn’t happened yet, and that’s what is inevitable. All human systems, including economics, are based on and reflect the laws of nature. We can delude ourselves with our language and our formulas and our currencies and our mathematical interpretations into believing this or perpetuating the imbalance. But at some point, it must give in; it must give way.-James West

There is no longer any means of reversal of the beginning of the final phase of inflation. For your sake, protect yourself immediately. Be prepared for disruptions in distribution common to hyperinflation…. The key event was when Lehman was flushed – all hell broke loose. The hell cannot be contained in any practical manner.-Jim Sinclair

The latest so called ‘economic stimulus package’ is nothing more and nothing less than creating money out of thin air. It absolutely guarantees hyperinflation within eighteen months time frame, possibly much less ….. This next wave down is going to be a whopper because it will involve the popping of the commercial real estate bubble and its associated derivatives.-Greg McCoach

Central banks gorged themselves with worthless dollar reserves and prevented a hyperinflation of the dollar in the process...

Nations today, with little gold holdings seemed to have no clue to where this was all going... They must be thinking that the dollar can be expanded forever and never lose value! To this end, they have based their entire social and economic order on selling goods to the US for a dream in return. Yet, after all these years they are only now seeing that foreign dollars are worthless when the US only runs a trade deficit that will not reverse. The real risk today is now being understood. The American economy will only slow down from a hyperinflation,,,,, and that will be caused from a shift from the dollar reserve function!

Few investors can "grasp" that in reality, our dollar has already been hyperinflated, but without the higher price effects. Years of deficit spending, over borrowing, debt expansion have created an illusion that the dollar was immune to price inflation. This illusion is evident in our massive trade deficit as it carries on with no negative effects on dollar exchange rates. Clearly other investors, outside the Central Banks were helping in the dollar support process without knowing they were buying into a dying currency system.-FOA in 2000

I think supply destruction will influence prices pretty soon. too.Janzen and I are in complete agreement there.http://ispeakofpeak.blogspot.com/2009/01/supply-destruction.html

My larger concern is that there is no way that all debt that the US is going to issue is going to be bought by foreigners. Ergo some will have to be monetized. Can we see an inflationary crisis from a loss of faith?Keven Depew at Minyanville thinks it cannot happen as there is no economy larger (or about the same size) than the US that is doing better than the US?Still one has to wonder whether monetization in any amounts will allow to USD to survive.

I read Kevin's "5 things" article. I think he makes the same mistake other deflationists make. That is to confuse a couple different things. The first is confusing inflation and hyperinflation. I believe that hyperinflation IS a form of deflation, as defined by the deflationists. Asset prices continue deflating in REAL terms even as nominal prices soar. The second confusion is the use of the term "aggregate demand". That means overall demand for everything. In a hyperinflation, the only demand that matters is the demand for survival necessities. And even now, that demand is not falling.

There are two completely different reasons a man will spend a dollar bill. The first is when he feels he can afford to spend that dollar, because he has plenty more. And the other is when he is fearful of holding that dollar bill until it is worthless. He'd rather have something real, anything real, than that dollar bill.

Most of the loss of household wealth from home values and stock crashes is not deflationary which I have gone into in several of my posts. If you thought you had a million dollar house and now it's only worth $500K, that is not a reduction in the money supply. Credit contraction and job losses are deflationary, but not to the price of necessities. The turn that will come is completely psychological. But it will become very real very fast.

In my opinion, this paragraph demonstrates several mistakes:

The assumption is that this record-breaking credit expansion means risk assets (stocks, commodities, etc.) will all skyrocket and the U.S. dollar will get destroyed. But what hyperinflationists fail to realize is that for an inflation (of either the tame or hyper variety) to take place, one must have both the means (credit from the fed and banks) and the motive (the desire to take on more debt) for credit expansion. For over a year now we have had record amounts of the former, but none of the latter.

The first mistake is that he is looking to "risk assets" to lead the inflation/hyperinflation. This will probably never occur. Instead, the other end of the spectrum will lead. The second mistake is that he sees inflation as a "tame variety" of hyperinflation. I see them as totally different animals, similar only in name. As I said, hyperinflation IS deflation combined with currency collapse. The third mistake is that he thinks we need credit expansion in order to have hyperinflation. The fact of the matter is that credit dies before the currency collapses. There is no credit period, let alone credit expansion, in Zimbabwe.

And lastly, the argument you mentioned...

Additionally, in order for hyperinflation to even be a remote possibility here there would have to be at least one economy that is both stronger than the U.S. during a global economic downturn, and larger in size than the state of Ohio's or even California's economy.

Ironically, while smaller emerging markets could potentially find themselves facing a Zimbabwe-esque hyperinflation, that would only make the U.S. dollar and U.S. debt more attractive and secure. Emerging markets are at this point the only place where it seems a possibility that credit could find a willing home and debt an eager taker, but even that is not a certainty. It is more likely that the creeping protectionism that is developing, as countries begin to wake up to the fact that the global system is too big to save, results in a more severe credit contraction globally.

This is another mistake I see the deflationists make all the time. They will dismiss Zimbabwe and Argentina as irrelevant because America has the biggest economy, the biggest money supply, and in fact owns the world's reserve currency. In other words, they see all of these as strengths. As I have said before, I believe the opposite is true. These "strengths" are the Achilles heel of the dollar.

Because the dollar is spread far and wide, a confidence crisis in the dollar can literally emerge from any corner of the globe. Whereas in smaller countries, it can only come from within. Also, because it is the reserve currency, there are far more dollars out there in the world than just one country can handle. So if the chickens ever do come home to roost, the coop will be overrun almost immediately.

And lastly, he is saying that the floating exchange rate system (the FX) will work in the dollar's favor. I believe that this system of judging fiat currencies against other fiat currencies is one of the biggest threats to the entire system. Remember, this didn't even exist until the '70's. So what if the dollar starts heading well above 100 on the USDX in a short period of time? Do you think that will be a positive development for the dollar? I don't think so. It will be more like a last gasp. Look for extreme volatility in the currency markets soon. I think that will be one of the signs that time is very short.

Here is my view of inflation. In our system, any bearable inflation is a healthy thing. True, it is not healthy, but that's only because the system is not healthy. But for the system, any bearable inflation is healthy. Therefore, that is the goal of the monetary elites. However, something has changed. In the past, systemic health was always a fairly wide target to hit, with the dangers of a deflationary spiral on one side and a hyperinflationary collapse on the other. But what has changed is that target has become vanishingly small.

Think of it as a bean bag toss game. There is a wide flat platform with a target painted on it. If Ben throws well he can easily land on the platform. If he throws too soft, he lands on the slope facing him (deflation), and if he throws to hard, he overshoots and lands on the slope beyond the platform (hyperinflation). Well now, that platform has shrunk to a knife's edge. The entire game is just the front slope, and then the back slope. To avoid a collapse, Ben has to land the bean bag right on the knife's edge. But... Ben fears landing on the front slope more than the back slope. So on which side do you think he'll err?

For a better description of why I think the "healthy" target has vanished, see Richard Mayberry's two charts in my post, The Collapse, from September 12th (right before the collapse of the stock markets). You can click on the charts for a larger view.

Richard describes the boom bust cycle like a feedback loop, in which each peak and valley is more extreme than the previous one. And each time, it takes a greater effort by the Fed to reverse. Until finally, any amount of injection that is big enough to reverse a deflation will end in hyperinflation. The middle ground has vanished.

And from there, we have to ask ourselves, how far will Ben be willing to go to avoid deflation? I think the answer lies in the fact that no one seems to fear hyperinflation. In fact, all the deflationist theories are contributing to this lack of fear, which may in fact seal our fate.

Is the dollar too big to hyperinflate? I think its largesse could possibly create the mother of all hyperinflations.

I do not relish hyperinflation. I am one of the few that fears it. Gold is going higher than anyone imagines with or without hyperinflation. Some people think that hyperinflation is their golden lottery ticket. They are misinformed.

Do not apologize for the long post. It was extremely informative and well written. Thank you for taking the time to do so.What is find amazing is that deflationists ignore thier own definition "expansion of credit" ..while it is true in the need like you said there wont be any credit, currently govt credit is expanding faster than lines of credit are being pulled. To run a 1.75 trillion deficit means someone has to extend that credit. Hence net credit in the system has actually expanded.

We both see hyperinflation as very likely...I see it coming from the first blood of monetization whereas I think you see it from the money supply side.God Help us if either of us are right.

I'm with you. I think monetization will be the spark that lights the fire. The money supply that's already out there will be the fuel that burns. Then they will fight the fire by throwing more fuel on it.

I don't think the rest of the world will put up with Washington abusing its privilege as custodian of the world reserve printing press for its own benefit. But I see many ways the fire could ignite. I only view the future as a set of probabilities. And I see many possible variations that all lead to the same outcome.

Bonds may have a wild ride if there are any surprises from this week's meeting of Federal Reserve policy makers.

With interest rates already near zero, policy makers are likely to focus their debate on unconventional measures -- so-called quantitative easing -- to increase the nation's money supply and jolt the economy out of recession.

Investors will zero in on any changes in the Fed's stance about the idea of buying long-dated Treasurys. The Fed floated the idea at its December policy meeting but backed away from it at the January meeting.

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